Opportunities and Challenges of Carbon Finance in China​

Updated: Feb 1, 2021


“Global carbon market value soars to EUR €194 billion and grows 34% in 2019, led by Europe”, “The eight pilot schemes in China had a turnover of USD $301 million, up 40% from 2019.” The numbers listed here indicate carbon finance has grown significantly in recent years and will grow further especially in China.

The Ministry of Ecology and Environment in China announced a national carbon emissions trading scheme which will be effective on 1st Feb 2021 as part of efforts to meet a 2060 carbon neutrality target by developing market mechanisms. The rules require all enterprises in specific sectors with more than 26,000 mt/year of CO2 equivalent emissions to be included in the scheme. Entities registered under the national scheme will sign off from the regional schemes and will be allowed to use voluntary Chinese Certified Emissions Reductions (CCER) to meet up to 5% of their compliance obligations under the scheme each year.

Global emissions trading mechanisms

Emissions trading schemes can be introduced at various levels such as international, national as well as sub-national and depending on their design, can cover either businesses or governments. Under the Kyoto Protocol, there are three internationally recognized mechanisms: Joint Implementation (JI), the Clean Development Mechanism (CDM), and Emissions Trading (ET).

The major purposes behind these mechanisms are:

  1. Stimulate sustainable development through technology transfer and investment

  2. Help countries with Kyoto commitments to meet their targets by reducing emissions or removing carbon from the atmosphere in other countries in a cost-effective way

  3. Encourage the private sector and developing countries to contribute to emission reduction efforts

Emissions trading mechanism in China

China was actively involved in CDM for over a decade. And the combination of Chinese Emission Allowance (CEA) with Chinese Certified Emission Reduction (CCER) is the two major mechanisms being used currently in China.

Carbon Finance

Carbon emissions trading can be recognized as a financial tool under Carbon Finance. The aim of Carbon Finance is to reduce the impact of greenhouse gases (GHG) on the environment by giving carbon emissions a price.Financial risks and opportunities impact corporate balance sheets, and market-based instruments are capable of transferring environmental risk and achieving environmental objectives. The general term is applied to investments in GHG emission reduction projects and the creation (origination) of financial instruments that are trade-able on the carbon market, which can create the motivation for corporates to take the GHG emission as part of strategic management decision-making.

There are also other financing tools including but not limited to:

Further development of carbon finance is important and challenge. As the complexity of the financial system, carbon finance is not an isolated thing.

Opportunities and Challenges of Carbon Finance in China

The national carbon emissions trading scheme that has been announced in China is an important step, it will bring further opportunities in the carbon market but will also bring challenges in the meantime:

On the corporate level:

  • What will be the legal requirements on carbon emissions in China? Understand and comply with the legal requirements up to date will be important and challenge.

  • Before trading the carbon emissions, it will be critical to set up carbon emissions calculations system and auditing process.

  • Behind the carbon emissions trading, cooperates need to know what and how to report on their balance sheets.

  • Setting up strategic goals on carbon emissions reduction will be challenging but the profit behind the carbon emissions trading can be significant.

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